Statement 8: Statement of Risks (Continued)
The revenue and expense estimates and projections published in the 2011‑12 Budget Papers are based on a range of economic and other parameters. If the economic outlook were to differ from that presented in the Budget, the revenue and expense estimates and projections would also change. The sensitivity of Budget estimates to changes in economic assumptions is discussed in Appendix A of Statement 3.
The global financial crisis led to a period of heightened financial and economic volatility which impacted significantly on the preparation of the budget revenue forecasts. Despite some improvement in economic prospects since then, a degree of uncertainty continues in global financial markets and will continue to present risks to the revenue forecasts. Moreover, the effects of the earlier economic downturn continue to weigh on tax collections.
To the extent that unanticipated changes in economic circumstances occur, their impact will flow through to revenue forecasts. In 2010‑11 for example, natural disasters have significantly affected the economic outlook and consequently the outlook for tax receipts. Similarly, the strong Australian dollar has also had a significant impact on tax receipts.
Revenue forecasting also relies heavily on the historical relationships between the economy, tax bases and tax revenues. Such relationships may continue to shift as economic conditions change, requiring a greater degree of caution in their use in predicting future revenues. For example, the real and financial dimensions of the recent global financial crisis have posed particular challenges in estimating both the quantum and timing of loss utilisation. Any losses incurred during the downturn can be carried forward to offset gains or profits as the economy recovers, such that to the extent tax revenue improves it does so with some lag.
As in previous years, the fiscal outlook is subject to a number of contingent liabilities. A large number of these contingent liabilities reflect indemnities, including those relating to the Department of Defence, the Defence Materiel Organisation, Air Security Officers, the Future Fund Board of Guardians and the Reserve Bank.
The Government has also issued a number of guarantees, such as those relating to guarantee schemes for the banking and financial sector, payments by the Export Finance and Insurance Corporation and the superannuation liabilities of the Commonwealth Bank prior to its sale to the private sector.
Other significant contingent liabilities relate to uncalled capital subscriptions and credit facilities to international financial institutions and legal cases concerning the Australian Government. The Government continues to have robust and conservative strategies in place to reduce its potential exposure to these contingent liabilities.
There have been several changes to both the quantifiable and unquantifiable risks since the Mid‑Year Economic and Fiscal Outlook 2010‑11 (MYEFO). The recent natural disasters have increased the number of Comcover claims associated with damage to Commonwealth owned property and business interruption. In addition, general revaluations of securities and deposits have led to certain risks such as the Guarantee of State and Territory Borrowings, and the Financial Claims Scheme, being modified.
Several new items have arisen since the MYEFO, including the Government's commitments to provide financial assistance for victims of overseas terrorist acts and to support the Queensland Government's bid for the 2018 Commonwealth Games.
Several risks have been removed since the MYEFO. The removal of these risks reflects the passing of specific events and decisions such as the conclusion of legal cases, and the expiry of certain agreements such as Australia's standby loan facility for the Government of Indonesia.
The contingent liability for potential damages caused by Kistler space activities has also been removed as Kistler Woomera Pty Ltd and Spaceport Woomera Pty Ltd have ceased operating after the parent company Rocketplane Kistler Inc filed for bankruptcy in the United States in June 2010.
The Commonwealth's commitment to offer assistance to drought‑affected farmers under exceptional circumstances no longer represents a contingent liability due to improved conditions and the removal of regions in Eastern Australia from an exceptional circumstances declaration. While this contingent liability has been removed, the potential for the re‑emergence of drought conditions in the future continues to represent a fiscal risk for the Government. In addition, adverse seasonal conditions continue to exist in Western Australia.
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